Free-lance writer J. Tol Broome Jr. is a credit-risk manager for a Greensboro, N.C., bank.

The next time you apply for a business loan, don't be surprised if you discover that the terms have become more conservative. The chief federal banking regulator has warned bankers to tighten lax lending standards. And bankers are taking the warning to heart.

"The deterioration in credit underwriting standards we are seeing in the banking system is serious," according to Julie Williams, chief counsel of the Office of the Comptroller of the Currency. The 0CC regulates and examines more than 2,600 banks that account for more than 58 percent of U.S. banking assets.

Lax lending standards "could presage the same kind of problems that afflicted the industry nearly a decade ago," Williams told more than 100 bankers at a fall conference in San Francisco sponsored by the Federal Financial Institutions Examination Council.

Lax underwriting in the 1980s, along with a mild recession early this decade, led to high loan losses and a crackdown by banking regulatory agencies such as the 0CC.

Because of the OCC's concerns, Williams has indicated that her agency will stop up its level of supervisory vigilance.

Does this mean lending capital will dry up as it did in the early 1990s?

Joseph W May, executive vice president of Whitney National Bank in New Orleans, doesn't think so. "I strongly endorse Ms. Williams' theme," says May. 'While caution flags have been issued, there still is plenty of credit for creditworthy borrowers."

While May does not foresee another small-business credit crunch, he does expect to see some changes in bank lending standards. "I think some fringe players will have trouble getting credit," he says. 'We will see banks finance fewer speculative ventures like start-ups, and we will see closer adherence to prudent underwriting practices."

Carol Collison, a branch sales manager with West America Bank in St. Helena, Calif., says banks in her region have already started tightening underwriting guidelines. 'We were seeing other banks financing a lot of two-nickels-rubbed-together start-ups," Collison says. "But we are already seeing a lot less of that now. Banks are taking a more conservative lending approach in response to warnings from the regulators."

Tighter lending standards show up in five key areas:

Interest rates. When banks become more conservative in lending, they typically push up interest rates. In recent years, small businesses have seen interest rates-both fixed and variable-dip well below the prime lending rate, which typically is made available to a bank's best customers. As banks become more concerned about lending practices, however, interest rates are likely to increase to prime or higher for average-risk borrowers.

Collateral Collison says many banks in recent years have placed less emphasis on collateral than in the past As a result, a lot more unsecured lending has occurred.

In response to the 0CC warnings, however, banks can be expected to adhere more closely to collateral guidelines, such as 80 percent on real estate, 75 percent on equipment and accounts receivable, and 50 percent on inventory.

Personal guarantees. Banks historically have required personal guarantees from the owner or owners on small-business loans equal to the loan amount. In recent years, however, many banks have reduced the amount of guarantees required or have dropped personal-guarantee requirements altogether.

With a regulatory emphasis on more-prudent underwriting and with concerns that the economy may be slowing, banks will return to a more conservative approach in guarantee requirements. Says May: "Banks will be less inclined to stretch at this stage of the cycle not knowing how much longer this expansion will last."

Shorter terms. Collison says 15-year fixed rates on term loans had become routine in the industry just a few months ago. But that has changed. "The same banks that were offering 15-year fixed interest rates in 1997 and early 1998 are now back to 10 years or less," says Collison.

Expect to see banks stick to more-standard terms, such as one year for a line of credit, three to five years on equipment loans, and balloon payments at five to seven years on real-estate loans based on repayment schedules of 15 to 20 years.

Equity. More-conservative underwriting will lead to higher equity requirements. As Collison and May point out, banks will be far less likely to approve start-up loans. But the ones that are approved probably will include a requirement of 20 to 50 percent in equity from the borrower.

Even existing businesses will be required to demonstrate a higher net worth to he considered creditworthy This could particularly impact Subchapter S business owners who drain all of the earnings out of the venture.

Although Williams has made it clear that the 0CC will be scrutinizing bank underwriting practices more closely, she does not intend to spark another credit crunch. Instead, she hopes her warnings will help prevent another financing crisis.

Says Williams: 'The strength of our economy does not depend upon bankers making bad loans, In fact, poorly underwritten loans are one of the best ways that I know of to weaken financial institutions and the communities that depend upon them."

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